IFS analyses 2019 budget


Institute for Fiscal Studies (IFS) has presented its views and expectations over the 2019 budget.

These are the key areas the Institute highlighted on :

• Economic Growth and Job Creation;
• Fiscal Policy Stance and Realism of the Projections;
• Domestic Revenue Mobilization;
• Expenditure Control and Rationalization;
• Infrastructure Development and financing; and
• Exiting IMF Financial Program and Legislating Fiscal Responsibility.

Our statement is intended to contribute to the public discussions as well as the debate that will take place in Parliament prior to the approval of the budget.

1. Economic Growth and Job Creation

It is recalled that Economic Growth and Job Creating was the centrepiece of IFS’ pre-budget press briefing.
The views expressed therein reflected those articulated by the Institute in a paper titled: “Strong Economic Growth and Significant Reduction in Unemployment: The Critical Issues to Address in Ghana’s 2019 Budget” and published in October.

Among others, the paper pointed out that unemployment has become the most serious challenge currently confronting Ghana.

To ensure significant creation of jobs and minimize the problem of unemployment and its attendant socioeconomic ills, IFS suggested that strong broad-based economic growth, driven by agricultural growth and transformation, industrialization, and the closing of the country’s infrastructure gap, is critically needed.

The Institute is, therefore, happy—and, indeed, feels vindicated—to see that the 2019 Budget has included agricultural modernization, industrialization, and infrastructure development in its strategic pillars, alongside improving efficiency in revenue mobilization and protecting the public purse.

IFS noted that recent growth had been driven largely by the extractives sectors, but since activities in those sectors were highly capital intensive, they had not created enough jobs.

The nonoil sectors, particularly agriculture and manufacturing, which have higher capacities to generate jobs, however, had virtually stagnated in the past few years and this had compounded the unemployment problem in the country. The Institute, therefore, welcomes the attention being given these sectors in the budget.

The agricultural sector should be aided by scaling up irrigation facilities, extensions services, storage and preservation facilities, and marketing facilities. Regarding industrialization, the 1D1F policy could be the fulcrum to achieve major transformation of the economy so as to reduce our dependence on imports and increase employment.

The 1D1F policy, however, needs careful planning in terms of the type of products, factory sizes, locations, ownership, management, and the supply-chain (or raw material base). These decisions should be informed by Ghana’s previous industrialisation experience and international best practices. To ease the burden of financing the 1D1F policy on the public purse, private- and PPP-funding options should be considered.

In terms of direct creation of jobs, NABCO and the YEA programs may be important interventions to help alleviate youth unemployment, in particular. However, the capacity of the state to create large numbers of jobs on a sustainable basis is always tempered by issues of efficiency, productivity and budgetary costs.

Ideally, the private sector should be spearheading growth and job creation. The Ghanaian private sector, however, remains weak, bogged down by a myriad of bottlenecks, including overly regulatory burden, poor infrastructure, high taxes, high cost of credit, high cost of public services and the general adverse effects of macroeconomic instability.

It is important for government to continue to enable the private sector to drive growth and durable job creation by addressing the numerous bottlenecks mentioned above that continue to inhibit the sector.

2. Fiscal Policy Stance and Realism of the Projections

The 2019 budget indicates a policy change from fiscal consolidation to fiscal expansion. This is reflected in the projected increase in the budget deficit to 4.2% of GDP from 3.7% of GDP in 2018, and follows a period of consolidation in which the deficit was also reduced from 6.5% of GDP in 2016 to 4.8% in 2017. The policy change is seen in the fact that government spending for 2019 has been projected to increase significantly.

In 2019, government spending is projected to increase by a whopping GH₵15.62 billion, up from the increases of GH₵5.78 billion in 2017 and GH₵5.88 billion in 2018. If realized, the increase in government spending in 2019 will be the highest in absolute terms in the Fourth Republic.

In percentage terms, the projected increase in government expenditure of 27.0% in 2019 is the highest since 2012. While this policy reversal was not exactly anticipated by IFS, it did not come as a surprise to the Institute because the consolidation process had seriously constrained fiscal policy and affected economic growth. Therefore, it was just a matter of time that some policy stimulus would be injected into the economy.

We note that just as it happened in 2017 and 2018, total revenue and grants has once again been over-projected, high above what can possibly be collected, resulting in a small but artificial difference between total revenue and grants and total government expenditure. In 2019, the government has projected to increase total revenue and grants by as much as GH₵12.1 billion, compared with increases of GH₵7.5 billion in 2017 and GH₵7.1 billion in 2018.

Thus, while government was able to increase total revenue and grants by a total of GH₵14.6 billion in both 2017 and 2018, it has projected to increase total revenue and grants by GH₵12.1 billion in 2019 alone.

Again, in 2018, nominal GDP growth was 16.3% and revenue growth was 17.9%. However, in 2019, despite the projected fall in nominal GDP growth to 15.3%, revenue growth has been projected at 25.8%. Given this obviously over-optimistic projection, it is hard to see the revenue increase in 2019 being realized. After all, the government has proposed to implement similar revenue enhancing measures in 2019 as it did in the past two years.

It is important to point out that fiscal expansion has been a common characteristic of the country’s fiscal policy whenever the country leaves an IMF program, which has normally led to high fiscal deficits and macroeconomic instability.

The IFS therefore cautions government that it has to be careful not to derail the fiscal gains made in the past two years, since the consequences could be unpalatable. In this regard, the IFS recommends that in 2019 the government should continue to pursue the expenditure policy it pursued in 2017 and 2018, i.e. aligning expenditures with actual revenue collections, so as to avoid fiscal overruns. We have more to say below on what the policy direction should be post-IMF program.

3. Domestic Revenue Mobilization

IFS made domestic revenue mobilization one of the key points in its pre-budget statement. It has to be said that revenue performance has been generally disappointing in the past few years, with actual collections consistently falling short of targets.

Indeed, Ghana’s tax effort leaves a lot to be desired. The tax/GDP ratio was 11.3% in 2016, 11.9% in 2017 and is projected to be 12.6% in 2018.

These ratios are significantly below the potential of the country as well as the average ratio of about 25% for low middle-income-country peers. IFS has written and spoken extensively on the revenue quagmire, citing a number of reasons, including: the near-exclusion of the informal sector from the tax net, high level of exemptions, pervasive evasion, overly-generous incentives offered to the extractives and free-zones companies, under-taxation of real properties, illicit financial flows, and other fraud and corruption.

The Institute has stressed the need to address these lapses in the context of a comprehensive strategy involving reforms in policies, systems, administration and enforcement.

The Institute is pleased to note that measures are being taken in the 2019 budget in several of the areas it has been drawing attention to. The Institute particularly recognizes and welcomes the following proposed measures:

• Major institutional reforms within GRA to make it more effective and efficient and plug sources of irregularities and revenue leakages;
• Intensified tax compliance, including by checking import undervaluation, avoidance of tax payment on warehoused goods, non-issuance of VAT receipts and other irregularities;
• Using legal actions to retrieve overdue tax liabilities;
• Accelerated automation of tax administration systems;
• Engaging more creative strategies and new approaches to broaden the tax net to rope in individuals and businesses that continue to operate outside the net;
• Using TIN to get more persons and businesses on the tax radar;
• Increased formalization through the National Identification Scheme database as a tax administration tool; and
• Government partnering with, and resourcing, MMDAs to enhance local-level revenue mobilization, including in the area of property registration and valuation.

IFS is also pleased to note the Minister’s expressed displeasure with the growing incidence and magnitude of tax exemptions, which the Institute has continually drawn attention to. As the Minister acknowledged, the exemptions are subject to gross abuse and irregularities. The decision to draft a policy to be passed into law to regularize the exemptions is, therefore, a step in the right direction and should be fast-tracked.

Another area that IFS has focused on extensively is the under-taxation of the mining sector as a result of the overly-generous rebates offered to mining companies in the original agreements signed with them.

The Institute has called for a review of these agreements to bring taxes paid by the companies in line with the current high profits being generated in the industry and with international standards and practices.

Here, the Minister only indicated the intention to aggressively enforce existing legislations and regulations to improve tax compliance, as well as plans to capitalize the exemptions granted them into additional government equity in the concessions.

While these steps are welcome, they still fall short of what IFS has been calling for, viz. a complete overhaul of the existing agreements.

It is noted that in light of the aforementioned and other initiatives to boost taxes, the tax/GDP ratio for 2019 is projected to be 13.1%, which is 0.5 percentage points above the projected 2018 figure of 12.6%.

The 2019 ratio is still nowhere near Ghana’s potential or that of its peers. Even more disappointing is the fact that over the medium term, the tax/GDP ratio is projected to rise marginally to only 13.3% in 2020 and then thereafter retrogress to 12.9% in 2021 and further to 11.9% in 2022.

These figures suggest that Ghana is still not getting it right when it comes to tax collection and that more innovative measures are needed to further scale-up the effort in that regard. Without sustained effort to this end, not only will long-term fiscal sustainability be elusive, but also economic growth will be seriously compromised while the vision of “Ghana beyond aid” will remain a dream.

4. Expenditure Control and Rationalization

IFS has continuously pointed to the importance of ensuring that we spend whatever revenue we collect prudently and efficiently so as to maximize the benefits to the Ghanaian people and promote national development.

The Institute has articulated extensively the presence of rigidities—in the form of earmarked funds, wages and debt service—that virtually hold the budget hostage and leave little or no fiscal space to address critical development and social outlays.

With this limited fiscal space, the Institute stressed in its pre-budget press conference the overriding need to restrict consumption spending, including relating to travel, entertainment, subsidies, free allowances, etc.

The Institute further suggested that public sector reforms that had been long delayed should be carried out as a matter of priority. The reforms should include right-sizing of the sector to reduce what is obviously an over-bloated pay roll, plagued by, among others, large numbers of ghost names and other irregularities.

The Institute also called for reexamination of some of Government’s policy initiatives, especially the consumption-based ones, such as nursing trainee allowances, teacher trainee allowances and some components of the FSHS policy, with the aim of streamlining them so as to reduce costs while exploring other non-Government funding options.

It was the Institute’s expectation that the 2019 budget would entail a serious strategy of expenditure rebalancing in favor of productive capital spending to enhance long-term growth.

In the budget, CAPEX is projected to be 2.5% of GDP. However, while this is up on the figure of 1.8% for 2018, it is the same as the figure of 2.5% for 2017 and less than 3.6% for 2016.

It has to be recognized here that the CAPEX line in the budget does not include grants to other Government units for capital projects.

Thus, total capital expenditure will be higher (it comes to some 4.1% in 2019). Yet still, we can also look at major expenditure lines in the budget that fall under recurrent expenditure to compare with CAPEX. For example, wages/GDP for 2019 is 5.6% of GDP, compared with 5.9% for 2018, 5.6% for 2017 and 5.6% for 2016.

Goods & services for 2019 is 1.8% compared with 1.5% for 2018, 1.0% for 2017 and 1.5% for 2016. Interest payments is 5.4% for 2019 compared with 5.0% for 2018, 5.3% for 2017 and 5.4% for 2016. Clearly, these individual recurrent expenditure items as well as their total (12.5% in 2016, 11.9% in 2017, 12.4% in 2018 and 12.8% in 2019) have generally been trending upwards over the period, while CAPEX appears to have stagnated.

This calls for further expenditure rationalization and rebalancing to give increasing weight to CAPEX to drive growth and jobs. The medium-term budget shows CAPEX increasing over the 2019 figure of 2.5% to 3.3% in 2020 and then falling slightly to 3.1% in 2021 and further to 3.0% in 2022. While the medium-term figures seem to be in the right direction, they could even be scaled up further with continued rationalization of expenditure.

5. Infrastructure Development and Financing
As note in our introduction, infrastructure development is one of the strategic pillars of the 2019 budget, which recognizes efficient infrastructure as a prerequisite to drive the government’s industrialization and agricultural modernization programmes.

To begin with, and as stated earlier, the central government capital budget is to be scaled up in 2019 to GH₵8.5 billion, rising to GH₵13.0 billion after including capital spending by other government units. The higher spending will benefit roads, railways, ports (air and sea), hospitals, ICT, and sanitation infrastructure development, among others.

Other initiatives to develop infrastructure are the Sinohydro infrastructure for bauxite arrangement, which is planned to take off in 2019; securitization of the GETFund to the tune of US$1.5 billion to provide education infrastructure; and creation of a Sovereign Century Fund as a vehicle to raise bilateral long-term concessional financing for commercial infrastructure projects, including Public-Private Partnership (PPP) investments.

Another critical announcement in the budget is the development of standardized designs and costs for infrastructure projects in education, health and roads to ensure standardized public construction and value for money.

While we support the prominence given infrastructure in the 2019 budget, we believe there is a need to anchor Ghana’s infrastructure development in a long-term national infrastructure plan, which will identify, cost, and prioritize the country’s infrastructure requirements on a long-term basis to meet the demands of a modern, middle-income economy.

The infrastructure plan itself should be based on a long-term national development plan.
We also want to draw attention to a recurring practice in the country whereby various amounts which are borrowed to finance infrastructure are not captured in the budget. The increase in such extra-budgetary borrowing activities has important fiscal and debt sustainability implications for the country.

There is the need therefore to control the growth of these activities and to widen the coverage of the fiscal accounts to incorporate these transactions. We believe that it would be appropriate—and indeed prudent—to align these borrowings strictly with the budget cycle.

The IFS intends to examine this issue more closely to come up with necessary reform proposals to enhance fiscal transparency and long-term debt sustainability.

6. Exiting the IMF Financial Program and Legislating Fiscal Responsibility

Ghana has an unenviable history of fiscal indiscipline manifested in recurring deficit overruns that increase borrowing and debt. The indiscipline tends to escalate in election years due to spikes in expenditure in those years.

The response to the usually ensuing macroeconomic instability has been to seek an IMF financial bailout. The bailout is normally accompanied by a program that prescribes strict policy conditionalities geared to restabilizing the economy and placing it on a path of sustainable growth.

Over the past three years or so, Ghana has been on an IMF program that has served as an anchor for the economy, with a brief interruption in 2016. The program has generally ensured prudent conduct of fiscal policy.

Government has indicated its intention to exit the program at the end of 2018. Exiting the program means that we are going to free ourselves from the conditionalities that anchored fiscal policy. We have been here before. In fact, Ghana has sourced IMF financial assistance 16 times in its history. This is precisely because we have failed on our own to exercise the needed fiscal discipline that the IMF program usually imposes on us.

Government has indicated that it plans to legislate fiscal responsibility after the IMF program. Furthermore, the medium-term budget deficit profile provides indication of Government’s commitment to enduring fiscal discipline and macroeconomic stability.

It has to be emphasized that it is only by entrenching macroeconomic stability that we can place the economic on a path of sustained strong growth, job creation and prosperity for all Ghanaians. Government has indicated its intention to pass a Fiscal Responsibility Law (FRL), in line with what it states to be its commitment to “ensuring irreversibility of the macroeconomic gains.”

The FRL will allegedly encompass a fiscal rule that will place the budget deficit within a 3-5% band. There is available empirical evidence that suggests that a deficit within that range is likely to ensure long-term fiscal and debt sustainability. The West African Monetary Zone, of which Ghana is a member, also specifies a deficit ceiling of 3% for the membership.

The envisaged fiscal deficit band of 3-5% would, therefore, appear to have a justified basis from that standpoint. The medium-term deficit profile—4.2% in 2019, 3.7% in 2020, 3.2% in 2021 and 3.1% in 2022—also seems to be in line with the planned rule.

In principle, IFS welcomes the passage of the FRL. It is a subject that the Institute has taken keen interest in since it was first mooted by the Vice President in 2017. In due course, the Institute will make its views known on the FRL and its key components—the fiscal rule and Fiscal Council—based on its own analysis and international best practices so as to contribute to the process of entrenching fiscal discipline and sustainability in the country.

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